LGPS 2008 AVCs - still worth it?

Triumph13

I'm trying to work out the best options for my OH's LGPS AVCs. We set up a standard Pru AVC policy in time to beat the rule change. We can therefore take 100% tax free cash by linking to the main scheme benefits. This seemed like a good idea at the time.

A few days later, of course, George dropped his budget bombshell and everything changed. As we plan to retire early, we should be able to just use the standard 25% TFLS plus OH's PA each year to get any DC pot out tax free anyway in the period between retiring and taking her DB benefits.

I'm now thinking that we should just stop the AVC payments and use her PP instead. As far as I can see the only thing the AVC has in its favour is as an insurance against rule changes or us delaying retirement such that OH's unused PA is less than the pot.

The disadvantage is the tie to the LGPS scheme and slightly higher charges.

Does anyone know if it's possible to transfer LGPS AVCS out separately from the main scheme ie if OH did continue them could she draw down the AVC against her PA whilst leaving the DB in deferment?

amandajc

I would be very interested in the answer to that question too, although I strongly suspect that it is "no" as I believe that the AVCs are tied tightly to the DB scheme so can't be separated out in that way. I was certainly told by our pension advisor that they could not be taken before the main pension is in payment.

I started buying AVCs to supplement my LGPS fairly recently (Dec 2013) but since the budget changes were announced I am planning to stop paying them in 2015 when the new rules are finalised. I would rather use the money to pay more into my private pension and take it out gradually in order to fund early retirement at 60, than have a larger tax free lump sum at 66.

Triumph13

Just looking at the Pru website it says that you can stop and restart or vary contributions at any time. I might be tempted to take it down to a nominal £10 a month.

If we do end up retiring later than planned then once the amount in OHs PP looks like exceeding what she could get out tax free the AVC could be resurrected.

The question is do I act now, wait for the finance bill, or wait to see who wins the next election? In fact that applies to just about everything at the moment!

Neasy

I am in a similar position to the OPs OH in that I started an AVC contract before April so as to retain the potential for 100% lump sum withdrawal. I've had some uncertainty about whether I should continue as well since the budget, particularly as the retirement age is retreating into the distance.

On balance I have decided to keep the AVCs going at a nominal amount a) because things may change and mainly b) because though I am currently a 20% tax payer & not very hopeful of a promotion any time soon, you never know what might happen, and if I did become a higher rate taxpayer it might be worth putting more into the AVC which could be taken 100% tax free if taken at the same time as the main LGPS pension, even if that was some way off into the future. In fact I need to work out the equation relating to the tradeoff between the tax benefit of the LGPS AVC 100% tax free lump sum and the actuarial reduction of taking the main LGPS benefits early. Hmm.

I do remember that there are some limits/conditions re timing of taking the pension after putting in a lump sum contribution though so one would have to be careful. Still, for me, on balance, the potential ability to do this is worth keeping the door open with a minimal monthly contribution.

Thanks for raising the question & I look forward to answers from the knowledgeable posters on this forum.

Neasy xx

Triumph13

Neasy wrote: »

I need to work out the equation relating to the tradeoff between the tax benefit of the LGPS AVC 100% tax free lump sum and the actuarial reduction of taking the main LGPS benefits early. Hmm.

That depends on what other pensions you would have / need whilst retiring early. eg if you retired 3 years early and had £40k to invest (to keep the numbers simple) then if you put it in a private pension instead of the AVC you could have £13,333 a year to live on tax free for the three years then take the pension without actuarial reduction. The £13,333 is a third of the tax free lum plus your £10k PA.

That way you get the money out tax free AND avoid any actuarial reduction.

taktikback

Don't quite follow that.

With the LGPS, you get an actuarial reduction for retiring early of the order of 4% per year. You also suffer from a smaller pension by missing 3 year's contributions. The longer you have been in, obviously the less that impact will be, but you still could be looking at an overall hit of 25%.

If retiring early is what you want to do, and you can swallow the 25%, then the AVC can be used to leverage out the 25% tax free lump sum without suffering further reduction. As you will be getting 20 or 40% tax relief on the way in, it seems to me the AVC is the perfect tool to achieve an economical early retirement

Wentthedaywell?

I probably sound really stupid, but how did the budget changes affect LGPS AVCs?

Specifically, will I be affected? I set up mine just before April to save just to get the 100% lump sum when I retire at 60 in 4 years' time. I realise my main pension will be actuarially reduced, but how will the budget changes affect my AVC amount?

I'd be very grateful for any information - I haven't been able to find anything on the internet.

amandajc

Hi. The budget changes don't affect your AVCs, or what they are worth, but they do mean that (for some of us) it will now be better to pay into a private pension than into the AVCs, if we aim to retire early.

I want to stop work at 60 but defer my LGPS pension till 66 (the reduction for taking it early would be about 27% which I wouldn't be prepared to accept). I started paying AVCs purely because of the option to take them all as a tax-free lump sum. However, I'm prepared to forego this, because changes introduced in the budget mean that I should now have the option to use the money to build up a private pension that I will be able to draw on to fund the years between 60 and 66. (Drawing out my tax-free allowance each year and supplementing this with funds from my S&S ISA). The money is worth more to me between 60 and 66 than it would be at 66 when my pension will have kicked in.

It all depends on your personal situation and whether you are OK with taking an actuarial reduction given the fact that your AVCs will give you a large tax free lump sum or whether (like me) you would be better off deferring the pension and funding the gap with a personal pension. The budget gave us extra options.

Triumph13

taktikback wrote: »

Don't quite follow that.

With the LGPS, you get an actuarial reduction for retiring early of the order of 4% per year. You also suffer from a smaller pension by missing 3 year's contributions. The longer you have been in, obviously the less that impact will be, but you still could be looking at an overall hit of 25%.

If retiring early is what you want to do, and you can swallow the 25%, then the AVC can be used to leverage out the 25% tax free lump sum without suffering further reduction. As you will be getting 20 or 40% tax relief on the way in, it seems to me the AVC is the perfect tool to achieve an economical early retirement

The LGPS AVCs are still great if what you want is a lump sum at the same time as you start your pension, perhaps to pay off a mortgage. As a general principle though what you really need in retirement is income, not lumps of cash. They are also good as a tax efficient vehicle for 'spare' money.

If you want to retire early they are a relatively poor option.

Going 3 years early gives a 15% actuarial reduction (16% for a man). Being able to use your additional contributions to live off for the gap between retirement and taking the pension to avoid having to take the reduction will normally give you a much better long term income.

The big change in the budget is to allow you to do precisely that - and in many cases to do it 100% tax free by using your PA and the 25% PCLS

Wentthedaywell?

Thanks, amandajc, for the helpful explanation, much appreciated.

I need to start looking into deferring my pension now. There's so much to learn and I am approaching it far too late really, but better late than never I suppose.